Educational Articles

Stock Screen: Industrial Services Stocks With Strong Fundamentals

Nicholas Patrikis
| August 08, 2014

Companies within the Industrial Services industry provide a wide array of products and services to large corporations and governments. To that end, financial performances among the stocks in this industry can be somewhat of a mixed bag, and may not move in conjunction with one another. That being said, they are more likely than not to be closely correlated to the health of the overall economy, thus thriving in times of high economic production and trailing off a bit when activity slows. Meanwhile, companies involved in the customer care and healthcare ends of the spectrum ought to get considerable boosts from expanding businesses and shrinking unemployment figures, as well as newly established healthcare regulation and reform.

Indeed, favorable operating conditions are apt to yield solid fundamental growth prospects. We have isolated several stocks with year-over-year earnings growth of over 15% in the past year. What’s more, alongside direct profitability metrics such as earnings-per-share, cash flow generation is an overwhelmingly important measure of a company’s ability to operate smoothly in the near term, so we required that all the ones on the list below have had cash flow growth of over 10% in the past year. The two companies highlighted below, Convergys Corporation (CVG) and MAXIMUS (MMS), sufficiently meet our criteria.

Convergys Corporation

As a global provider of customer management solutions, Convergys’ reach stretches from the United States, Canada, and Costa Rica, to the Philippines, Malaysia, and India, amounting to 150 worldwide contact and data centers in total, following its recently completed acquisition of Stream Global Services. Specifically, CVG’s services, which include customer service and retention, technical and device support, collections, and quality assurance, to name a few, are utilized by many different industries all looking to deliver top-quality customer relation services. Most notably, top-tier clients of CVG include telecommunication giant AT&T (T – Free AT&T Stock Report), and satellite service provider DIRECTV (DTV). The customer-intensive nature of the aforementioned industries, coupled with the increasing importance of satisfying customers’ needs and concerns (mainly to retain subscribers), makes these industries a focal point of Convergys’ business strategy.

The year-ahead outlook for the company’s core markets, as well as the broader economic landscape is a positive one. On top of that, the previously mentioned acquisition of Stream has since widened CVG’s client profile, thus alleviating some risk. Taking everything into consideration, we expect a noteworthy rise in CVG’s revenues and earnings in 2014.

The company began the year on the right foot. Convergys generated just under $606 million in sales in the first quarter, equating to stellar year-over-year revenue growth of 23%. Likewise, net income of $0.32 a share during the period improved 18% from the prior-year tally. The solid fundamental showing was accompanied by decent free cash flow generation. Looking forward, the company will probably remain focused on growth through acquisitions, as evidenced by the recent purchase of Stream, albeit future acquisitions may not rival the size of Stream. Furthermore, its healthy balance sheet, with a current ratio of 1.6 and minimal debt burden (15% of total capital) at end of the first quarter, augurs well for the fact. All things considered, Convergys Corporation’s solid financial prospects, alongside a modest, yet steadily improving economic backdrop, ought to appeal to investors with both a short- and long-term investment horizon.

MAXIMUS

MAXIMUS administers government-sponsored programs, namely Medicaid, Children’s Health Insurance Program, Affordable Care Act, and welfare. Moreover, the company has a decent international presence, deriving roughly a quarter of its 2013 total sales from overseas operations in Australia, Canada, the United Kingdom, and Saudi Arabia.

Shares of MAXIMUS have enjoyed a steady climb following the 2008 financial crisis with the stock price reaching a new all-time high back in late 2013. Undoubtedly, the provider of business process services (BPS) to government and human service agencies has been applauded by investors for its superior bottom-line growth over the years. To solidify this point, MMS’s annual earnings have grown at an eye-catching compound annual growth rate of 77% from 2006 to 2013. The story will probably sound the same over the pull to late decade, although the rate of growth may be slightly more conservative. Still, the company’s attractive long-term bottom-line prospects warrant a closer look from investors with a buy-and-hold strategy.

Not surprisingly, revenues have strengthened considerably. In fact, the company delivered 25% revenue growth in the June quarter of this year. Indeed, we think the stage is set for sustainable double-digit revenue expansion in 2014 and 2015. This extreme growth can likely be attributed to the evolving domestic health care landscape, which has really stepped into the limelight in the past few years, thanks to an overhaul of the U.S. healthcare system and programs such as the previously mentioned ACA and Medicaid. MAXIMUS’ Health Services segment, which comprised nearly 65% of revenues in 2013, has been responsible for much of the gains of late. This ought to remain the cornerstone of growth in the foreseeable future, as these programs continue to ramp up and a greater percentage of the population begins to age, therefore elevating the usage of said programs.

Cash flow growth has been fairly robust, as well. While the skimpy 50 basis point yield leaves much to be desired, the company appears to have taken a different route with its excess cash, as share buybacks and acquisitions are top priority. This is evidenced by the purchase of Health Management Ltd., a U.K. based service company. We expect this to be the case going forward, with slight increases to the payout being overshadowed by external growth opportunities, mainly on the international front, along with additional stock repurchases.

Company Name

Ticker Symbol

EPS Growth 1-Year

Cash Flow Growth 1-Year

Brookfield Asset Mgmt.

BAM

58.38

30.45

CBRE Group

CBG

16.39

11.97

Convergys Corp.

CVG

17.58

11.63

Huron Consulting

HURN

81.37

57.29

Jones Lang LaSalle

JLL

29.16

20.54

MAXIMUS Inc.

MMS

35.59

34.71

Mobile Mini

MINI

43.42

17.72

Navigant Consulting

NCI

21.11

12.34

Outerwall Inc.

OUTR

51.76

31.99

Towers Watson & Co.

TW

24.17

21.39

UniFirst Corp.

UNF

22.06

15.06

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.